One one hand, it meets my general criteria for buying stock well. Here are my current individual holdings and my rubric for determining if a stock is worth the risk. SPOT compares well to my other holdings.

My Love

I use Spotify every day and have so for years now. It’s a part of my everyday life and has improved it. Spotify is easily worth the $9.99/month.

Leadership

Daniel Ek, the founder and CEO of Spotify, has shown great leadership (and I prefer founder-led companies). Daniel is product and tech first. Daniel has done a great job delaying gratification and continues to invest in the long-term.

PE

This is the biggest drawback. I prefer to invest in companies that make a profit.

Cash

Spotify isn’t quite making a profit yet but their cash burn is controlled and they are close to sustained profitability. The hoard of cash left over now should begin to grow and allow Spotify to acquire.

Potential

Considering the total addressable market of the entire world, Spotify’s potential is the sky. That being said, Spotify doesn’t have a 10 in this category because of its marginal costs.

Spotify’s potential is is close but not quite like Google, Netflix or Facebook because Spotify is not a complete aggregator.

What is an Aggregator?

As Ben Thompson defines it, an aggregator has the following characteristics –

Direct Relationship with Users

Zero Marginal Costs For Serving Users

Demand-driven Multi-sided Networks with Decreasing Acquisition Costs

Unfortunately, Spotify doesn’t qualify as an aggregator as defined here. Spotify’s marginal costs for serving users music is around 52% per song.

Spotify is well aware of this and is working effectively to reduce marginal costs. As Spotify’s influence grows they gain leverage with the three major record labels. But more importantly, the marginal costs can be significantly lowered by signing deals directly with artists, as they have started to do.

But music is unique. Unlike news articles and TV, the backlog of music is as much, if not more, important than the new music. This gives the record labels a stronger position with negotiations and, at least currently, limits Spotify’s gross margin.

Macro View – Competitors

You don’t have to be an aggregator to be a great business but Spotify has other existential threats. Daniel Ek wasn’t the only person who recognizes how big this streaming opportunity is.

All of the big dogs are in the game. Apple, Google, and Amazon. And many smaller but unique threats – Sirius, Tidal, iHeartRadio, and Soundcloud.

Apple, Google, and Amazon all have deep pockets and distribution methods for their streaming services.

Apple distributes Apple Music by pre-installing it on every iPhone it sells. Pre-installed apps have a leg up over many competitors simply due to the friction of downloading another app. Google and Amazon have numerous ways to distribute their streaming services, with their hit smart speakers being their most successful.

The others all bring something unique to the game as well. Sirius has much more original content, a more radio-like experience, and has a solid car distribution strategy. Soundcloud is doing a great job capturing the young, upcoming artists.

Focus

As of now, despite my bullishness, I’m standing on the sidelines with buying $SPOT. The waters are too bloody for me, too much competition with too many threats.

But that may change. Unlike Apple, Amazon and Google, Spotify is not a small side product for Daniel Ek and company. Spotify’s greatest strength against these top dogs is to stay laser beam focused on creating the best streaming music experience for listeners and creators.

If Spotify continues that mission while getting their marginal costs down through leverage with record labels and signing artists directly, I’ll start piling up the stock.